You're confusing the two tests. The first is just a test of the MD5 function with the word, "test." Once you have created the MD5 function, use it with the argument "test" to make sure your MD5 function returns the proper result.

To test your md5 function, we would expect the md5 hash of the string "test" to be 098f6bcd4621d373cade4e832627b4f6.

The second test, using the test form, is to test whether you're using your MD5 hash properly with your token, userid and password to generate a key to be used with subsequent API calls:

To help with testing, enter your token here and we'll generate the key for you with the userid and password of the account currently signed in.

Note that by userid, they mean the unique userid toodledo assigns to each user.